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Railroad Stocks

Investing in the Oil Transportation Boom

By Marcelina Hardy
Tuesday, November 5th, 2013

The oil industry in Canada is booming. The amount of oil being manufactured is astounding.

A lot of that oil is sent to the United States for refinement. But there's a problem: transporting the oil to the U.S. isn’t as easy as it could be.

Enter Keystone XL pipeline.

train carsThe Keystone XL pipeline project is TransCanada's (NYSE: TRP) plan to connect the U.S. and Canada. There is already a Keystone pipeline in the works; however, the XL is an expansion of that pipeline allowing more oil to come into the U.S. from Canada.

But the Obama Administration has put the breaks on the project. And the main reason being cited is environmental concerns.

The administration hasn't completely cut the project, but as it continues to stall in its decision, the pipeline isn’t available to transport oil to some of the refineries in the United States. Still, Canada is going to continue to move that oil. What are some ways it can do that?

Railroads, of course.

Canadian Pacific Railway Ltd. (NYSE: CP) and Canadian National Railway Co. (NYSE: CNI) have seen surges in business with the increase in oil. Canadian Pacific projects shipments of 85,000 to 90,000 car loads a day by the end of the year from just 65,000 car loads at the start of the year. Canadian National, meanwhile, expects to have 60,000 car loads a day – doubling the amount shipped last year.

In the U.S., the oil boom is powering ahead as well – particularly in North Dakota and Texas. The growth in production is so much that the nation's pipelines have not caught up. So the U.S. is turning to the railways too.

While the delay in approving the Keystone XL project can cause frustration, it is benefiting railroad companies greatly. Railroads have been much busier because of the excess in oil, and that means the companies are booming – and investors in railroad stocks are receiving a pretty good return.

Warren Buffett, chairman and chief executive of Berkshire Hathaway (NYSE: BRK-A), is loving railroads' role in oil transportation. Berkshire Hathaway, which owns railroad company Burlington Northern Santa Fe (BNSF), saw third quarter profits soar by 29% to $5.05 billion.

How to Invest in Railroads

If you're interested in railroad investing, your best bet is to pick the companies that are most active in the North American oil boom. Some of these include:

  • Union Pacific (NYSE: UNP)

  • Canadian National (NYSE: CNI)

  • Norfolk Southern (NYSE: NSC)

  • CSX Corporation (NYSE: CSX)

Union Pacific has a dividend of dividend and yield of 3.16 (2.10%). According to Yahoo Finance, it's one-year target estimate is $171.64 from its current price of $153.76. Canadian National has a dividend and yield of .82 (.70%). It’s estimated to reach $115.32 from $110.97 in a year.

Norfolk Southern has a dividend and yield of 2.08 (2.40%). It’s set at $86.84 right now, but it’s estimated to reach $92.77 within a year. And CSX Corporation has a dividend and yield of .60 (2.30%). It’s priced at $26.48, and it’s expected to rise to $28.04 in the year.

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But it may not be long before pipelines take back the crown. While there are some environmental concerns with the Keystone pipeline, a recent study found that transporting oil by rail is much riskier than through a pipeline. Fraser Institute in Calgary found that road transport is the most dangerous, with 20 incidents per billion ton-miles, and railway follows with about two incidents per billion ton-miles. Pipelines, meanwhile, only had 0.6 incidents in the same range.

It's only a matter of time before this information results in a transfer back to pipelines. But that doesn't mean rail stocks are done with their gains. Approval and construction of piplines are both timely and costly, so it will be a while before rail transport loses its luster.

Union Pacific, Canadian National, Norfolk Southern, and CSX Corporation have long term growth potential – as do many other railroad stocks. Do your due diligence and determine which is best for your portfolio. Any smart investor would jump at these now before they get too big.

 

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